1 (a) (i) Audit implications of Canary Co acquisition
Up to 1½ marks for each implication explained (3 marks maximum for identification):
– Develop understanding of Canary Co business environment
– Document Canary Co accounting systems and controls
– Perform detailed analytical procedures on Canary Co
– Communicate with previous auditor
– Review prior year audit opinion for relevant matters
– Plan additional work on opening balances
– Determine that Canary Co is a significant component of the Group
– Plan for audit of intra-company transactions
– Issues on auditing the one month difference in financial year ends
– Impact of acquisition on analytical procedures at Group level
– Additional experienced staff may be needed, e.g. to audit complex goodwill
Maximum marks 8
(ii) Risk of material misstatement
Up to 1½ marks for each risk (unless a different maximum is indicated below):
– General risks – diversification, change to group structure
– Goodwill – contingent consideration – estimation uncertainty (probability of payment)
– Goodwill – contingent consideration – measurement uncertainty (discounting)
– Goodwill – fair value of net assets acquired
– Goodwill – impairment
– Identify that the issues in relation to cost of investment apply also in Crow Co’s
individual financial statements (1 mark)
– Loan stock – premium on redemption
– Loan stock – accrued interest
– Loan stock – inadequate disclosure
– Identify that the issues in relation to loan stock apply to cost of investment in Crow Co’s
individual financial statements (1 mark)
– Online sales and risk relating to revenue recognition (additional 1 mark if calculation
provided of online sales materiality to the Group)
– No group accounting policy for online sales
– Canary Co management have no experience regarding consolidation
– Financial performance of Crow Co and Starling Co deteriorating (up to 3 marks with calculations)
– Possible misstatement of Canary Co revenue and profit
– Grant received – capital expenditure
– Grant received – amount not yet spent
– New IT system
– Starling Co – no finance director in place at year end
Maximum marks 18
(iii) Goodwill
Generally 1 mark per specific procedure (examples shown below):
– Confirm acquisition date to legal documentation
– Confirm consideration details to legal documentation
– Agree 100% ownership, e.g. using Companies House search/register of significant shareholdings
– Vouch consideration paid to bank statements/cash book
– Review board minutes for discussion/approval of acquisition
– Obtain due diligence report and agree net assets valuation
– Discuss probability of paying contingent consideration
– Obtain management representation regarding contingency
– Recalculate goodwill including contingency on a discounted basis
Maximum marks 5Marks
(b) Ethical matters
Generally 1 mark per comment:
– Reasonable for partner to attend board meetings
– But must avoid perception of management involvement
– Partner must not be appointed to the board
– Seconded manager would cause management and self-review threat
– Safeguards could not reduce these threats to an acceptable level
– Some recruitment services may be provided – interviewing/CV selection
– But avoid making management decision and put safeguards in place
Maximum marks 6
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Maximum 37
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26Marks
2 (a) (i) Matters to be considered in agreeing the terms of the engagement
Up to 1½ marks for each matter identified and explained (2 marks maximum for identification):
– Management’s responsibilities
– Intended use of the information and report
– The contents of the business plan
– The period covered by the forecasts
– The nature of assumptions used in the forecasts
– The format and planned content of the assurance report
Maximum marks 6
(ii) Procedures on forecast financial information
Up to 1 mark for each procedure (brief examples below):
– General procedures examples:
o Re-perform calculations
o Consistency of accounting policies used
o Discuss how joint venture has been included
o General analytical procedures
– Procedures on income statement:
o Discuss trends – allow up to 3 marks for calculations performed and linked to procedures
o Review and compare breakdown of costs
o Recalculate profit on disposal, agreement of components to supporting documentation
– Procedures on statement of financial position:
o Agree increase in property, plant and equipment to capital expenditure budget
o Discuss working capital trends – allow 2 marks for calculations performed and linked to
procedures
o Agree movement in long-term borrowings to new loan documentation
o Obtain and review forecast statement of changes in equity and confirm validity of
reconciling items
Maximum marks 13
(b) (i) Audit procedures on costs of closure
Generally 1 mark per specific procedure, examples given below:
– Review board minutes for discussion and date of decision
– Review detailed, formal plan and date of its approval
– Review any public announcement and the date it was made
– Physically inspect factory prior to year end for evidence of dismantling of assets
– Consider whether costs included are relevant (redundancies and lease cancellation fees are
the most common type of relevant costs included)
– Agree relevant costs to supporting documentation
– Review note to financial statements for accuracy and completeness
Maximum marks 6
(ii) Problems in measuring and reporting on social and environmental performance
Up to 1½ marks per comment discussed:
– Difficulties in defining and measuring targets and KPIs
– Problems in quantifying some measures, e.g. employee satisfaction
– Inadequate systems and controls to accurately measure
– Difficult to compare between companies or over time
Maximum marks 4
Professional marks for the overall presentation of the notes, and the clarity of the explanation and
assessment provided.
Maximum marks 4
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Maximum 33
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27Marks
3 (a) (i) Implications of the audit senior’s note
Generally 1 mark for each matter discussed relevant to money laundering:
– Definition of money laundering
– Placement – cash-based business
– Owner posting transactions
– Layering – electronic transfer to overseas
– Secrecy and aggressive attitude
– Audit to be considered very high risk
– Senior may have tipped off the client
– Firm may consider withdrawal from audit
– But this may have tipping off consequences
Maximum marks 6
(ii) Reporting that should take place
Generally 1 mark for each comment:
– Report suspicions immediately to MLRO
– Failure to report is itself an offence
– Examples of matters to be reported (identity of suspect, etc)
– Audit senior may discuss matters with audit manager but senior responsible for the report
Maximum marks 3
(b) Professional skepticism
Generally 1 mark for each comment:
– Definition of professional skepticism
– Explain – alert to contradictory evidence/unusual events/fraud indicator (up to 2 marks)
– Part of ethical codes
– Coot Co – evidence is unreliable and contradictory
– Absence of authorisation is fraud indicator
– Additional substantive procedures needed
– Management’s comments should be corroborated
– Control deficiency to be reported to management/those charged with governance
– Audit junior needs better supervision/training on how to deal with deficiencies identified
Maximum marks 6
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Maximum 15
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28Marks
4 For each requirement, generally 1 mark for each matter discussed:
(a) Grouse Co
– Situation is a close business arrangement giving rise to threat to objectivity
– Explain self-interest threat
– Explain intimidation threat
– Only acceptable if financial interest immaterial and relationship insignificant
– Sale of software to audit clients would require full disclosure of financial benefit
– Sale of software to audit clients creates self-review threat
– Sale of software perceived as providing non-audit service
– Risks heightened for listed/public interest entities
– If enter business arrangement must withdraw from audit of Grouse Co
– Commercial consideration – demand for product
– Commercial consideration – experience of partners
Maximum marks 8
(b) Plover Co
– Potential breach of law and regulations
– Further understanding to be obtained
– Consider potential impact on financial statements
– Discuss with those charged with governance
– Management should disclose to relevant regulatory body
– Auditor could disclose in public interest
– Issues with confidentiality
– Take legal advice
– Extend audit work in relation to the legal claim
– Risk of material misstatement
– Consider integrity of audit client
Maximum marks 7
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Maximum 15
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29Marks
5 (a) New processing area
Generally 1 mark for each matter/specific audit procedure:
Matters:
– Materiality calculation
– Borrowing costs are directly attributable to the asset
– Borrowing costs should be capitalised during period of construction
– Amounts are correctly capitalised
– Depreciate from September 2011
– Additions to non-current assets should be disclosed in note
Evidence:
– Review of costs capitalised for eligibility
– Agreement of sample of costs to supporting documentation
– Copy of approved capital expenditure budget/discuss significant variances
– Agreement of loan details to loan documentation
– Recalculation of borrowing costs, depreciation, asset carrying value
– Confirmation of completeness of disclosure in notes to financial statements
Maximum marks 8
(b) Audit report
Generally 1 mark per comment:
– Inappropriate headings
– Paragraphs wrong way round
– Amounts not quantified
– Impact on financial statements not described
– Unclear from audit report if any accounting taken place for the pension plan
– No reference made to relevant accounting standard
– Use of word ‘deliberate’ not professional
– Materiality calculation
– Discuss whether adverse opinion appropriate (up to 2 marks)
Maximum marks 7
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Maximum 15
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